Letter of Intent to Buy a Business in Australia: What to Include (and What to Watch Out For)

A letter of intent is one of those documents that sounds more complicated than it is — and then turns out to be more important than people think.

It sits right in the middle of the acquisition process: after you've done enough work to know you want to proceed, but before you've committed to anything legally binding. Get it right and it sets up a clean, efficient path to completion. Get it wrong and you'll either scare off a good seller, hand too much leverage to a bad one, or spend money on lawyers untangling something that should have been clear from the start.

Here's what you need to know about LOIs when buying a business in Australia.

What is a letter of intent in a business sale?

A letter of intent (LOI) — sometimes called a heads of agreement, term sheet, or memorandum of understanding — is a document from buyer to seller that sets out the key terms of a proposed deal before a formal contract is negotiated.

Think of it as a handshake in writing. It says: "Here's what I'm proposing, here's roughly how I'd structure it, and here's what I need before we go any further."

In Australian business sales, particularly for SMEs in the $500K to $5M range — the kinds of businesses in trades, cleaning, landscaping, and services — the LOI is almost always the point where a deal either gains real momentum or quietly dies.

It's also where first-time buyers frequently underestimate what they're agreeing to.

LOI vs Heads of Agreement: the Australian distinction

Before going further, let's clear up the terminology — because it trips people up constantly.

In Australia, heads of agreement and letter of intent are used interchangeably in most SME transactions, but they carry slightly different weight in practice. An LOI tends to be shorter, less formal, and more of an expression of interest with key terms attached. A heads of agreement tends to be more structured and is sometimes treated as a quasi-contract by the parties involved (though usually still non-binding on the main deal terms).

If a broker or seller's solicitor asks you to sign a heads of agreement, read it more carefully than you would an LOI. The language can be tighter and there's occasionally an attempt to make certain commercial terms binding.

For the purposes of this article, I'll use LOI — but apply it to both.

What goes into an LOI when buying a business?

A well-structured LOI for an Australian business acquisition covers the following:

1. Purchase price and structure

State the proposed price clearly. If you're buying assets (the business and its equipment) rather than shares (the company itself), say so — because it matters for tax, liability, and contract novation. Most SME deals in Australia are structured as asset sales, but this should be explicit.

If the price has a variable component — an earn-out based on future performance, for example — describe the mechanism. A broker told me recently about a deal that fell apart two months into due diligence because the buyer had assumed the price was fixed but the seller had mentally included a significant earn-out. Neither of them had bothered to write it down at LOI stage. Months of work, gone.

2. What's included (and what's not)

Specify what assets are included in the sale: equipment, vehicles, plant, stock, intellectual property, customer contracts, the business name, and goodwill. Then specify what's excluded: the seller's personal vehicle that happens to be on the books, debts owed to the business, or any related-party arrangements you want unwound before settlement.

This is especially important in trades businesses, where there's often a mix of business-owned equipment and gear the owner personally owns. If it's not in the LOI, you'll argue about it during due diligence.

3. Working capital assumption

This one gets skipped in almost every first-time buyer's LOI, and it causes problems at settlement. Include a working capital target — the minimum level of cash, debtors, and creditors that the business will have at settlement. Without it, a seller can strip cash out of the business in the months before completion and hand you a shell.

This is covered in more detail in Module 6 of the Playbook, but the short version: agree a normalised working capital figure at LOI stage, even if it's approximate.

4. Conditions precedent

These are the things that need to happen before the deal can complete. The most common ones are:

Satisfactory completion of due diligence
Finance approval (if you're borrowing)
Key customer or supplier contracts transferring to the buyer
Landlord consent to assign the lease
Any regulatory approvals required (licences, certifications)

Be specific. "Satisfactory due diligence" is a condition that will hold up in practice — courts have generally been reluctant to force parties to complete once a buyer raises a genuine due diligence concern — but vague conditions create disputes. If you need finance approval from a specific bank by a specific date, write that in.

5. Exclusivity — in the LOI or separate?

You have two options here, and which one you choose depends on how much friction you want at LOI stage.

Option A: Include exclusivity in the LOI. This is the traditional approach. You ask for 30-45 days of exclusivity as a binding clause within the LOI itself. It's clean, it's simple, and it protects you from spending money on due diligence while the seller shops your offer around. The downside is that some sellers baulk at granting exclusivity before they've even agreed to your price in principle — it feels like a lot of commitment early on.

Option B: Keep the LOI lightweight, then move to a separate Exclusivity Agreement. This is what I prefer. The LOI goes in fast with a ballpark offer — no exclusivity, no deposit. You give the seller 30 days to consider the ballpark. If they're comfortable, you then sign a formal Exclusivity Agreement — typically 60 days — which is where you commit real resources to due diligence. The Exclusivity Agreement includes a break fee (say $30K-$50K) payable by the seller to cover your third-party legal and accounting costs if they walk away or reject your final offer without reasonable cause.

Why the two-stage approach? Because it's a slow stranglehold. The LOI gets you in the door with minimal friction. The seller doesn't feel locked in, so they're more likely to engage openly. By the time you move to the Exclusivity Agreement, they've already mentally committed to your offer range — and now the break fee ensures they can't waste your time and money. You end up in a stronger position than if you'd pushed for exclusivity on day one and spooked them.

Either way, the principle is the same: don't spend $10,000-$20,000 on accountants and lawyers without some form of protection against the seller taking a competing offer. Whether that protection sits in the LOI or in a separate agreement is a tactical choice.

6. Confidentiality

The LOI should confirm that the terms of the deal, and the fact that a deal is being negotiated, remain confidential. This is particularly important in small local markets — trades businesses in regional areas or suburbs where the seller's staff, customers, or competitors might find out.

7. Transition and handover

Outline what you expect from the seller during and after settlement. For a trades business, this typically means a handover period — usually 4-12 weeks — during which the seller introduces you to key customers, explains operational processes, and remains available for questions. Write the expected duration and whether it's paid into the LOI. It's far easier to agree this in principle now than to negotiate it when the seller is counting down the days to retirement.

8. Key binding clauses

Most of an LOI is deliberately non-binding — you're not locked into completing the deal at this stage. But certain clauses should be binding:

Exclusivity: binding for the stated period
Confidentiality: binding regardless of whether a deal completes
Break fee: occasionally used in larger SME deals — a fee payable if a party walks away without reasonable cause

State clearly in the LOI which provisions are binding and which are not. This protects you if the deal falls apart and prevents the seller from claiming you agreed to something you didn't.

What happens after you sign the LOI?

Once both parties have signed the LOI, you're into the due diligence period. This is where you verify that what the seller told you is actually true. It covers financials, operations, legal, commercial, and people — and it's where most deals either confirm or fall apart.

A thorough guide to due diligence on a small business will take you through what to check. For now, the key point is that the LOI should set the timeline for DD — typically 30 days for a straightforward SME acquisition — and the seller should provide a data room (even if that's just a shared folder) with the agreed documents.

After due diligence, you move to drafting the business sale agreement (BSA), which is the legally binding contract. That's negotiated by solicitors, and it operationalises all the terms you agreed in the LOI. This is why getting the LOI right matters — every term you leave ambiguous at LOI stage becomes a billable negotiation at BSA stage.

Red flags to watch for in an LOI (from a buyer's perspective)

If a seller (or their broker) presents you with an LOI to sign rather than the other way around, read it carefully. That's not inherently suspicious — plenty of sellers have been through a sale before and have their own template — but it does mean the document was written to protect them, not you.

Specific things to watch for:

No exclusivity. As mentioned above, this exposes you to competing buyers during your due diligence period. It's a reasonable ask and most sellers will grant it. Push for it.

Binding price before DD. Some LOIs attempt to fix the price as binding before due diligence is complete. Don't agree to this. Price should be subject to due diligence findings, particularly around normalised earnings and disclosed liabilities.

Vague working capital provisions. Or none at all. Pin this down.

Short DD periods. A 14-day due diligence period is not enough for any business with real complexity. If a seller is pushing for speed, ask why. Sometimes there's a genuine reason (a competing offer, a landlord deadline); sometimes they don't want you looking too closely.

Earn-out provisions buried in the transition clause. Some sellers try to sneak an earn-out into what looks like a standard handover clause — "if revenue exceeds X in the first 12 months, seller receives Y." Know what you're signing.

When NOT to sign an LOI

A few situations where you should hold off rather than sign immediately:

You haven't done a proper business valuation yet. An LOI with a price locks your negotiating position. If you haven't valued the business properly, you might be agreeing to overpay before you've done the work to know whether the price is fair.

You haven't confirmed finance is available. Not necessarily approved — but you should have had a conversation with a lender or broker to understand if the numbers work. An LOI with a finance condition protects you, but if finance falls through after exclusivity expires, you've wasted the seller's time (and potentially burned a relationship for future deals in the same industry).

The seller can't or won't answer basic questions before LOI. If a seller is stonewalling on financial information — actual P&Ls, not just a broker's information memorandum — before you've even agreed terms, that tells you something. It doesn't mean the deal is bad, but it's worth understanding the pattern before you sign anything.

A simple LOI structure

For a straightforward Australian SME acquisition — let's say a cleaning or landscaping business in the $500K-$2M range — your LOI should cover:

Parties — buyer entity, seller entity, business name
Indicative purchase price — and whether it's for assets or shares
Included/excluded assets — plant, equipment, vehicles, stock, IP
Working capital target — minimum level at settlement
Conditions precedent — DD, finance, lease assignment, licences
Exclusivity — 30 days, binding
Confidentiality — binding
Transition — expected handover period and whether paid
Proposed timeline — LOI signed → DD completed → BSA executed → settlement
Binding provisions — state what is and isn't binding

Total length for a typical SME LOI: two to four pages. If someone is sending you a 20-page heads of agreement for a $600K cleaning business, something has gone wrong in the process (usually it means a solicitor got involved before the commercial terms were agreed, which is expensive and tends to cause more problems than it solves).

Working out the financing alongside the LOI

If you're borrowing to buy the business, your LOI should include a finance condition tied to a specific date. Most Australian lenders — ANZ, NAB, CBA, and the business finance specialists — want to see signed heads of agreement before they'll process a formal approval. Which means you're sometimes in a chicken-and-egg situation.

The practical solution: have a preliminary conversation with a business lender or broker before you submit the LOI, get a sense of what they'd lend against a business of this type and size, and then write the LOI with a realistic finance approval date. Don't assume the money will be there — understand how business financing actually works in Australia before you commit.

This is covered in depth in Module 6 of the Playbook.

Getting the LOI drafted

You don't need a solicitor to write a first-pass LOI for an SME transaction — and in my experience, involving them too early adds cost and can slow momentum at a stage where speed matters for the relationship. Write the commercial terms yourself (or use a template), get alignment with the seller, and then pass the agreed LOI to your solicitor to check before you sign.

For the BSA — the actual sale contract — use a solicitor. That's not optional.

The full process of buying a small business in Australia is covered in detail elsewhere on this site, but the sequencing matters: commercial terms first, legal review second, not the other way around.

Frequently asked questions

Is a letter of intent legally binding in Australia?

Most of an LOI is not binding — the deal terms themselves (price, structure, conditions) are typically expressed as non-binding. But specific clauses — exclusivity, confidentiality, and any break fee — are usually binding. Your LOI should state clearly which parts are binding. If it doesn't, get it clarified before you sign.

What is the difference between an LOI and a heads of agreement in Australia?

In practice, the terms are often used interchangeably for SME transactions. A heads of agreement tends to be slightly more formal and is sometimes drafted in a way that implies greater commitment. Read both carefully. The key question is which clauses are stated as binding, not what the document is called.

How long should exclusivity be in an LOI?

For a straightforward Australian SME acquisition, 30 days is standard. For more complex businesses — multiple locations, regulatory licences, key contract novations — 45 to 60 days is reasonable. Shorter periods are possible but risky; if your due diligence runs over time, you lose your protection.

What happens if I find something bad during due diligence?

A well-drafted LOI gives you a due diligence condition that lets you walk away if findings are unsatisfactory — without penalty. This is standard and sellers know it. What it doesn't do is let you renegotiate the price indefinitely based on minor issues. Use it for genuine material findings, not as a negotiating tactic.

Do I need a solicitor to write an LOI?

Not necessarily, for a first-pass commercial draft. You do need a solicitor to review it before signing, and you definitely need a solicitor to draft the business sale agreement. Get the commercial terms agreed first, then involve lawyers.

The bottom line

An LOI isn't the finish line. It's the starting line for the serious part of the process — due diligence, financing, legal negotiation, and settlement. But it sets the tone and the terms for everything that follows.

Get the commercial terms right, include exclusivity, nail down working capital, and be clear about what's binding. Don't over-engineer it or let it drag on. A good LOI gets both parties aligned and moving in the same direction.

The rest of the acquisition process — from evaluating businesses to negotiating the final contract — is covered in Module 7 of the Playbook.

And if you want a regular look at how deals actually get structured and negotiated in Australia — including the things that go wrong — subscribe to The Leveraged Worker newsletter. It's free, it's practical, and there's no corporate fluff.